Reviving demand key in Covid-hit economy

October 27, 2020 9:14 AM

For the current year, the advanced economies have been projected to grow by (-) 5.8% which is 2.3% more compared to the estimates made only 4 months earlier.

It is indeed gratifying that the agriculture sector with a declining share of 14.6% of GDP has an appreciable growth rate of 3.7% in FY20, followed it by a rise of 3.4% in Q1 of FY21.

By Sushim Banerjee

It is an  accepted fact that the features of global economy have undergone a paradigm shift under the Covid pandemic. Especially, the concept of development economics, the branch that highlights the trend of various sectors of the economy as the country progresses from primary or agrarian stage to first the developing status glorifying the role of industry or the secondary sector and ultimately reaches the advanced economy category to display the characteristics of technology, innovation and sustainable growth of the economy with major role by the service sector.

Some of the emerging and growing segments, tourism, hospitality, hotels and restaurants, travel and transportation, trade, media and entertainment, public and professional services, commercial buildings, and a few others have witnessed a sudden and stiff decline.

As these are the sectors which have a significant role to play in the wealth creation of the advanced countries, it was firmly perceived that waiting for the disappearance of the virus in the aftermath of the vaccine discovery and to be in a position to bring back the trust and resilience in the economy, it
would be quite prudent to give a boost to the economy by providing massive stimulus by way of strengthening the social safety network and investment in infrastructure (roads, rails, ports, real estate, oil and gas transportation, renewable energy).

As the interest rate was low and, in some cases, negative in developed countries, it was found manageable with rising public debt and in the backdrop of a robust scheme of bond based long term capital flows, the declining trend in the growth trajectory for these countries was halted. This has been duly reflected in the recent IMF projections. For the current year, the advanced economies have been projected to grow by (-) 5.8% which is 2.3% more compared to the estimates made only 4 months earlier. Specifically, the US economy to grow by (-) 4.3% (from (-) 8.0%), Germany by (-) 6.0 (from (-) 7.8%), France by (-) 9.8% (from (-) 12.5%).

The massive stimulus expenditures would largely be spent on infra which would create demand for commodities like steel, cement, aluminum, mining, generate employment in industry (light, medium and heavy) and fuel the consumer demand for domestic appliances, electrical equipment, automobile including commercial vehicles.

For India, the traditionally growing segments under service sector that have contributed to GDP growth more than the other two sectors of agriculture and secondary sectors in the past few decades have been hit hard.

The segment, trade, hotels, transport and communication holding presently a share of 19.4% of GDP has degrown by 47% in Q1 of FY21, financial, real estate and professional services with a share of 21.9% in GDP rose by (-) 5.3% in first quarter, while public administration, defence and other services holding a share of 13.9% of GDP has grown by (-) 10.3% in the first 3 months of the current year.

It is indeed gratifying that the agriculture sector with a declining share of 14.6% of GDP has an appreciable growth rate of 3.7% in FY20, followed it by a rise of 3.4% in Q1 of FY21.

Credit goes to the Government for appreciating the value of agriculture for contributing to GDP growth in terms of more production of food items, rise in employment generation and income. A slew of measure including the much-needed reforms in marketing of agricultural output and creation of adequate infrastructure have lent permanency to the rise in rural income. A good monsoon has been an added enabler.

The share of secondary sector at an average 30.2% of GDP has been nearly stagnant for the last 3 decades which has impacted adversely the growth of MSME segment with consequent impact on employment and per capita income growth.

The Covid, its intensity and probability of recurrence have made us to rethink of the strategic thrusts on specific economic sectors. And this should be directly linked with identification of a few sectors that would grow with flow of investment and would in turn generate demand in the downstream segments like capital goods, intermediate goods, construction and infrastructure goods and consumer goods and all these are employment intensive. The secondary sector perfectly fits the bill.

(The author is Former DG, Institute of Steel Development and Growth. Views expressed are personal.)

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